A Bear Fights Soros and a Bullish Tide on InterOil

Is InterOil a great way to play Asia’s commodity boom or a overhyped company worth a fraction of its $3.4 billion market value?

In recent weeks, the debate has escalated over InterOil, a publicly traded exploration outfit drilling for natural gas in Papua New Guinea.

George Soros loves InterOil. The billionaire hedge fund king’s Soros Fund Management, which manages more than $20 billion, disclosed in a securities filing this month that it had nearly doubled its stake in InterOil. He owns about 5.3 million shares, or about 12 percent of the company. At $300 million, his InterOil stake is the third-largest stock holding in his fund, according to the filing with the Securities and Exchange Commission.

A spokesman for Soros Fund Management declined to comment on the position. According to securities filings, he began buying the stock in early 2009 at around $33 a share. On Wednesday, InterOil’s shares were trading above $76.

Whitney Tilson hates InterOil. And unlike the Soros fund, Mr. Tilson, who runs the hedge fund firm T2 Partners, isn’t shy about sharing his views. On Nov. 6, in a blast e-mail sent to 2,000 recipients, Mr. Tilson lambasted the company, which he has done periodically — and publicly — over the past year:

“This is a company that has NO RESERVES — not proven, probable or even possible; just a ‘contingent resource estimate’ from a firm that InterOil paid, after shopping among firms — and has NEVER delivered on its countless promises of huge natural resource finds in over 200 press releases over more than 10 years. Sure, there’s gas there — this isn’t Bre-X — but we think there’s only a tiny fraction of what IOC claims.”

Mr. Tilson’s recent tirade came just after InterOil raised $266 million in its first publicly underwritten offering, a deal backed by, among others, Morgan Stanley. He acknowledges that with the capital increase, the short case on Interoil becomes less compelling. InterOil, which has been burning through cash, now has money to finance its capital-intensive exploration business.

Although his hedge funds run only $155 million, Mr.Tilson has carved out a prominent place in the world of stock pickers. A Warren E. Buffett acolyte, Mr. Tilson writes for publications including The Financial Times and runs the Value Investing Congress, a well-attended event where big investors including William A. Ackman of Pershing Square Capital Management and David Einhorn of Greenlight Capital Management show up to discuss their best ideas.

Mr. Tilson isn’t concerned that Mr. Soros’s fund is on the other side of his bearish bet. “George Soros is one of the greatest investors of all time, but he’s made his fortune on big macro calls, not stock picks,” Mr. Tilson told DealBook. “And you need to do in-depth research on this company to understand why InterOil’s not all that its promoters crack it up to be.”

InterOil reported a third-quarter loss this week of $14.4 million on sales of $208.5 million, generated largely through an oil refinery business. “Our efforts to monetize our discovered resources have advanced significantly over the past several months,” said Phil Mulacek, the company’s chief executive, in a statement.

A Morgan Stanley analyst raised its earnings estimates on InterOil on Tuesday, saying it was bullish on the stock with an overweight rating and a $135 a share price target.

Mr. Tilson, who first shorted InterOil around $30 a share in April 2009, is licking his wounds but remains resolute. “We think this stock will ultimately go down in history as one of the greatest promotions ever,” Mr. Tilson said. “Yes, there’s natural gas there, but we think only a small fraction of what the company claims and certainly not enough to justify the company’s market cap.”

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